Assignment 9: Financial Section (version 1.0) and Human Resources Section (Version 1.0)
Financial section evaluation sheet (PDF)
HR section evaluation sheet (PDF)
Financial Section
The financial plan is the glue that holds the entire thing together. It is the basic evaluation of investment opportunity and needs to represent your best estimates of financial requirements. The purpose of the financial plan is to indicate the venture’s potential and present timetable for financial viability. It can also serve as an operating plan for financial management using financial benchmarks. This section unites the assumptions from all other sections in the plan (sales forecasts, gross margin assumptions, technology development, etc.).
Refer back to the Product section. How does your product development timeline relate that to your need for capital? What are you going to need money for and when? How will you generate / raise/ borrow this money? Start with a cash flow analysis, by quarter, taking into account all your major expenses—people, manufacturing costs, etc.—and then use a spreadsheet to determine what your quarterly burn rate will be. Show when your firm will reach cash flow break even. All great technologies must be effectively built, and then produced and serviced at a level such that the company can react to growth, as well as service requests that the industry demands.
Your financial analysis should include:
Financial Summary
Annual income statement and cash flow statements for years 1–3. Remember, cash flow is the most important and you must track it relentlessly in a startup. Make a special emphasis to show how you generate your top line revenue and what assumptions you are making in this. It merits its own chart and section because everything depends on top line growth and that is the first thing we will look at.
Pro Forma Income Statements
(monthly for year 1, quarterly for years 2–3, annually for subsequent years)
- Using sales forecasts and accompanying production or operations costs, prepare pro forma income statements for at least three years
- Start off with a detailed but concise explanation of your top line revenue and what is driving it. Explicitly state all assumptions in this (and all other) financial projection. Discuss sensitivities to your sales numbers. Give a worst, best and likely scenario for the sales projections.
- Fully discussed assumptions (e.g., the amount allowed for bad debts and discounts, were any assumptions made with respect to sales expenses, were general and administrative costs a fixed percentage of cost or sales) made in preparing the pro forma income statement and document them.
- But always remember that Income Statement does not equal Cash Flow and while it is important, Cash is king.
Pro Forma Cash Flow Analysis
(monthly for year 1, quarterly for years 2–3, annually for subsequent years)
- Project cash flows monthly for the first year of operation and quarterly for at least the next two years, detailing the amount and timing of expected cash inflows and outflows; determine the need for and timing of additional financing and indicate the requirements for working capital; and indicate how well-needed additional financing is to be obtained, such as through equity financing, bank loans, and short-term lines of credit from banks, on what terms and how is it to be repaid. Remember to use cash-based, not accrual-based, accounting.
- Discuss assumptions, such as those made on the timing of collection of receivables, trade discounts given, terms of payment to vendors, salary and wage increases, and anticipated increases in operating expenses, seasonality or cyclical business implications for inventory requirements, inventory turnovers per year, capital equipment purchases, and so forth. Again, these are real-time (i.e. cash), not accrual.
- Discuss cash flow sensitivity to a variety of assumptions about business factors (e.g. possible changes in such crucial assumptions as receivables collection or sales levels relative to forecasts).
Breakeven Chart
- Calculate breakeven and prepare a chart that shows when breakeven will be reached, and any stepwise changes in breakeven that may occur.
- Discuss the breakeven for your venture and whether it will be easy or difficult to obtain, including a discussion of the size of breakeven sales volume relative to objective total sales, the size of gross margins and price sensitivity, and how the breakeven point might be reduced in case the venture falls short of sales projections.
Ownership
Which of the founders get how much of the pie? Talk about the investment sought, but do not allude to how much you are willing to give up. In real life, this is the part you negotiate with the VC (valuation).
Cost Control
Describe how you will obtain information about report costs and how often, who will be responsible for the control of various cost elements, and how you will take action on budget overruns.
Financial Conclusions
Highlight the important conclusions, such as what the maximum amount of cash required is and when it will be required. State how much money you will need and what the possible sources of it are and your current decision on where to get this needed capital from. Note how much you will need at each expected milestone and what exactly the money will be used for. If you get investment in equity or debt, state how and when you expect to return it to the investors and what their expected return will be, if it is equity.
Addendum: Capitalization Table
Compile a capitalization table indicating ownership percentages of the founders, VCs and option pool assuming you get the financing requested when you request it. Include important key hires specifically and then the general employee stock option pool as well. Show the valuation multiples for your company and changes in the value of ownership stakes on a year-by-year basis. Note: This would never appear in a real business plan, but it is a useful exercise to understand who benefits from value creation over time, and we ask you to include it for purposes of this exercise.
Human Resources Section
In tandem with the Financial Section, you will also have to do a Human Resources or Team Section. This will likely be a key driver of your financial plan as salaries are often the number one expense for startup companies. This section should cover the following points:
- Who is on the founding team? What are the roles for each? What qualifications do they have for these roles? How committed are they?
- Who are your advisors? How committed are they?
- What additional skills do you need to add to the team to be successful and when? Where do you intend to look to source them from? Make sure the hires are aligned with milestones in your overall plan and are consistent with your financial plan.
- Show how your organization will evolved over the next three years (organizational charts can be effective to convey this info)? What do you anticipate it will look like in 5 years?
- A discussion of the capital stock table here with regard to key employees and the employees in general is appropriate here as well.
